How Family Businesses Remain Resilient | Lessons all leaders can learn from

Family businesses are often lumped together in one category as though they were all exactly the same beast. Speak to most people and the term ‘family business’ brings to mind a small or medium-sized enterprise with a local focus. Family scandals, extra-marital affairs and squabbles over inheritance and succession usually come with the territory. While I know and have heard of many family businesses that fit the stereotype; it simply doesn’t accurately reflect the powerful and formative role that family-owned enterprises play in shaping the world economy.

In 2017, family businesses accounted for 70% of global GDP and provided 60% of the world’s jobs. Two-thirds of the largest family-owned firms in the world are based in Asia. In Singapore, the top 15 family businesses alone have assets equivalent to 48% of national GDP. In India, family businesses are estimated to account for about two-thirds of GDP (Accenture Strategy).

For those born-and-raised in business families, their initiation into a career trajectory often begins in childhood. They start by helping out their elders at work–with little tasks here and there that over time evolves into a role with significantly more responsibility. This is in stark contrast to most young people in the world today who begin their careers when they finish university and land themselves their very first internship. Having worked with and hired numerous interns over the years, I know that education has its limits in preparing students for working life.

Unlike large corporations–which are owned by shareholders and managed by a board of directors–the ownership structure of a family firm gives the owners a long-term view and an inner compass that public listed companies quite often lack. In a public company, the owners are mostly investors and their influence over how the business is run is limited. When they’re unhappy, they sell their shares and move on–causing huge fluctuations in a company’s share price and valuation.

On the other hand, the ownership structure of a family business rests with a relatively small number of people who are related. Their ability to shape the trajectory of the business tends to be heart-centred as it is based on the relationships they have with one another. A study by the Center for Management and Economic Research at École Polytechnique found that during good economic times, family-run companies don’t earn as much money as companies with a more diversified ownership structure. But when the economy slumps, family firms far outshine their peers.

The conclusion the researchers reached was that family businesses focus on resilience more than performance. The survival of the family unit tends to take priority over financial performance. While the leaders of family and non-family firms have similar financial goals, the familial obligation a leader feels towards the enterprise will lead to very different strategic choices. Owners of family businesses tend to forgo the exponential returns that are available during booms in order to increase their chances of survival during busts.

While countless corporations use stock grants and options to turn ‘managers’ into leaders (and shareholders) to minimise the principal-agent conflict, family firms already have a deep sense of personal ownership when it comes to their finances. As a result, they tend to be more cost-conscious when making decisions.

Family firms, on average, tend to be far more fiscally conservative. Long-term capital expenditures and commitments are never made unless they provide a good return based on sound fundamentals. Even after that, it’s typically scrutinised against other potential projects to keep spending strictly within the company’s budget. Family businesses tend to only invest in projects that show a strong probability of feasible future returns. This limits their financial exposure in times of crisis because they’ve avoided spending on projects that do not create long-term economic value.

In my experience, I’ve found that family-controlled firms also abhor and avoid debt like the plague. Debt has a very strong relationship with financial risk and in the event that a major setback occurs, it leaves all members of the firm exposed to a large liability.

While family-run enterprises do focus on a core business, they tend to be more diversified than the average corporation. Family firms focus on organic expansion by acquiring small investments and slowly building them over time. This allows family businesses to expand–as opposed to contract–during a recession and downturn. Corporations, on the other hand, tend to strategise and plan before launching. They often do not have the option to start small in a foreign market when they plan a market entry. When a crisis hits, family businesses tend to be far more diversified than public companies, which are only likely to invest in areas where they only ever had a short-lived competitive advantage to begin with.

Part of the problem when studying family businesses as a category is that data on private companies—family owned or not—is not easy to find or piece together. Multigenerational family businesses are also often seen as distinct from first-generation family businesses—as they are by definition–survivors.

Numerous businesses across many industries have been negatively impacted by the COVID pandemic. That goes without saying. While leaders continue to have concerns about their short-term revenue loss and cash flow, surprisingly few family-run businesses have deeper concerns about their survival and well-being as a family business. They seem to know implicitly that they’re going to continue existing.

The question about whether leaders–and by extension entrepreneurs–are born or made is age old. A recent study by Case Western Reserve University found that 37 to 48 percent of the tendency to be an entrepreneur is genetic. It goes without saying that we get half our genes from each of our biological parents. Therefore, it isn’t a far leap to claim that a person could also inherit the genes to pursue entrepreneurship. Environmental factors combined with a DNA inheritance could also trigger entrepreneurial characteristics. While genetics is undoubtedly a factor, it is by no means the only factor.

As to who inherits the lucky draw of those genes and as to which environment fosters and nurtures it to be the best it can be–now, that comes down to chance and circumstance. But one thing is for sure, a monetary inheritance can be squandered or passed down to someone who is simply unworthy. But your genes–they run in your blood.

And that–no one can take away from you.

7 thoughts on “How Family Businesses Remain Resilient | Lessons all leaders can learn from

  1. Brilliant write-up. Thank you for sharing your thoughts and perspective on how family-businesses work and function. Most people are not privy or aware about this topic–other than the stuff that makes the news–which seems to be more about personal than professional.

    Like

  2. Small businesses usually grow much faster than big businesses. That is the thing most people don’t realise.

    Like

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